McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp third quarter 2023 earnings call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star key followed by the one key on your telephone. This conference call is being recorded today, Thursday, October 26, 2023. Before we begin, Note that the matters the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, including statements regarding our full year 2023 financial outlook, as well as statements relating to the company's expectations, strategies, prospects, or targets. These forward-looking statements are not guarantees of future performance and and involve significant risk and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under risk factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof, except as otherwise required by law. We assume no obligation to update any forward-looking statements. In addition to the press release issued today, The company also filed with the SEC the earnings release on Form 8K and its Form 10Q for the quarter ended September 30, 2023. Speaking today will be Joe Hanna, Chief Executive Officer, and Keith Pratt, Chief Financial Officer. I'll now turn the call over to Mr. Hanna. Go ahead, sir.

Thank you, Travis. Good afternoon, everyone. Thank you for joining us on our call today. Our third quarter 2023 reported earnings reflect further progress with our strategic growth focus on the modular business. We delivered impressive results for a third consecutive quarter this year. Rental revenues increased 22%, total revenues increased 40%, and adjusted EBITDA from continuing operations increased 47% in the third quarter. Once again, our teams executed very well. My sincere thank you to all our team members for your hard work and focus on what matters to our customers, our shareholders, and to each other with your incredible team coverage and delivery. As a reminder, on February 1st this year, we simultaneously acquired Vesta Modular and sold our Adler Tank business. Since then, we have been focused on integrating Vesta into our mobile modular business. Progress on key integration milestones is on schedule. All aspects have gone extremely well. During the third quarter, we completed our organization work and associated changes and have now fully integrated the Vesta team into our McGrath operating structure. Our new team members are very capable and engaged. In each of the key integration areas, we have been impressed with the number of ideas generated towards achieving our synergy targets. We have completed a bottom-up synergy analysis and feel confident in our ability to achieve our $8 million EBITDA synergy target. While still early, The cross-selling and geographic expansion opportunities we anticipated with the Vesta acquisition are being realized. Across the country, both Mobile Modular and Vesta sales reps have won incremental orders by being able to access our broader combined fleet. Our combined sales teams are working well together to leverage relationships and national accounts to win orders. They have begun sharing contacts in key accounts where one party may have had a stronger presence, resulting in more won business and sturdier relationships. Shifting now to provide a few highlights specific to our modular business. We were very pleased with overall business performance in the quarter. Rental revenues grew 36% and reflected not only more units on rent, but also continued benefit of the pricing appreciation trends that we have been realizing in prior quarters. Keith will provide more details on these trends in his remarks. Both our commercial business as well as our education rentals grew during the quarter. The wins we experienced are geographically broad-based and in a wide variety of market verticals, including government and technology. We also won business as a result of customers' investments in plants and manufacturing capacity that is reshoring. Our education business benefited from modernization and growth projects and encompassed both public and private school customers. We maintained our focus on solid execution. Our team actively managed pricing, fleet utilization, and deployment of new capital. and achieved a healthy 79.7% utilization at quarter end. In addition to our positive core revenue drivers, we also continued expansion of our revenues in the services portion of our customer offerings. Revenues from Mobile Modular Plus, site-related services, and our custom modular sales group all grew nicely in the quarter, and we remain excited about the opportunities these additional services offer our customers. Portable storage rental revenues grew 18% in the quarter. We are also quite pleased at the pace that this business is growing. We continue to make progress on pricing, with new shipment pricing up considerably compared to fleet averages. The acquisition of Design Space in 2021 and the acquisition of Vesta this year opened up opportunities for us to expand the portable storage business into new geographies. The Colorado market tuck-ins this year were also strategic initiatives to support this growth. They have been fully integrated and are performing to expectations. Turning now to TRS Rentalco. The softness we experienced earlier in the year around the semiconductor and computer business has not yet abated. Rental revenues decreased 10% for the quarter. We continue to take countermeasures to account for these business conditions and we are moving the needle. We have reduced our capital expenditures for new fleet considerably and continue to execute consistent fleet sales of underutilized equipment. to a net positive result as we ended the quarter with utilization up over 60%. Our efforts to right-size the fleet for current market conditions are an important step to manage the business responsibly. Finally, on a macroeconomic level, we recognize that there is some uncertainty in the economic outlook and some softening conditions as indicated by the recent ABI reporting. However, we are generally seeing steady business demand at McGrath for the remainder of the year and early indicators into 2024 appear positive. I am very pleased with our progress this year. We have good momentum with our pricing and services initiatives, which have considerable growth potential ahead. Additionally, with our acquisitions, We have the opportunity for densification at locations with low presence currently, so we remain very positive on the future growth potential for the business. We will be working hard to maximize every dollar we spend over the months ahead and are looking forward to finishing 2023 on a good note. With that, I will turn the call over to Keith, who will expand on my overall comments with greater financial detail.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered strong results in the third quarter, driven by the performance in our mobile modular segment. Looking at the overall corporate results for the third quarter, total revenues increased 40%, to 243.5 million, and adjusted EBITDA increased 47% to 95.3 million. Before the contributions from Vesta, McGrath had 20% total revenue growth and 25% higher adjusted EBITDA. During the third quarter, the company sold two properties used by the recently divested Adler Tanks business, which resulted in a $3.6 million net gain on sale and increased earnings per diluted share by $0.11. The total diluted earnings per share for the quarter, excluding this transaction, was $1.54, an increase of $0.43 when compared to a year ago. These property sales are reflected in other income on the income statement. Turning now to review of Mobile Modular's operating performance as compared to the third quarter of 2022, Mobile Modular had an impressive quarter with adjusted EBITDA increasing 83% to 73 million. Total revenues increased 69 million or 55% to 194.9 million. There were increases across all revenue streams including 36% higher rental revenues, 45% higher rental-related services revenues, and sales revenues, which more than doubled. Vesta contributed $34.9 million total revenue and $14.4 million adjusted EBITDA to the current quarter results. Before these contributions from Vesta, Mobile Modular also had an impressive 27% total revenue growth and 47% higher adjusted EBITDA. In addition to the contribution from the Vesta acquisition, our rental operations experienced strong organic growth across our commercial, education, and portable storage customer bases Sales revenues increased $29.9 million to $58.9 million, demonstrating good progress with our initiative to grow modular sales projects. Vesta contributed $16.2 million, or roughly half, of the increase. We continued our disciplined fleet management on a much larger fleet and achieved a 30% higher average rental equipment on rent, with average fleet utilization of 79.4%, down from 80.1% a year ago. Keep in mind that we have achieved this healthy total fleet utilization while integrating Vesta's fleet, which was utilized in the mid-70s at time of acquisition. The average monthly rental rate for the portfolio was 2.92%. which was 5% higher than a year ago, and reflects our focus on pricing optimization as well as continued healthy market conditions. Rental revenues increased by 36%, while inventory center costs increased 2%, and depreciation expense increased 30%, resulting in rental margins of 65%, up from 56% a year ago. Similar to last quarter, I will share additional data that help illustrate our progress with our modular business strategic focus. Third quarter, monthly revenue per unit on rent increased year over year from $633 to $695, a 10% increase. For new shipments over the last 12 months, the average monthly revenue per unit was $1,027. A year earlier, this last 12-month average revenue was $905. So we see a positive trend with new unit pricing, which is up 13% on a full year-over-year basis. Similar to last quarter, this data is for our legacy modular building and classroom fleet, excluding Vesta. These pricing dynamics are significant, positive, long-term revenue drivers. As the rental fleet churns, we expect a rental revenue tailwind as the average rental unit pricing for all units on rent moves towards current market rates. Our early progress with Mobile Modular Plus is embedded in these data points and is an additional growth opportunity for us. We continue to make progress with our modular services offerings. For our legacy modular business, excluding Vesta and portable storage, Mobile Modular Plus contributed 20 million revenue year to date, up from 13.7 million a year earlier. Site-related services contributed 18.3 million revenue year to date, up from 11 million a year earlier. We are in the early innings with these initiatives, and they are making positive, growing contributions. Turning to review of TRS Rentalco, adjusted EBITDA was 21.9 million, a decrease of 9% compared to last year. Total revenues increased 0.6 million, or 2%, to 39.1 million. We saw an increase in sales revenues partly offset by a softening in rental operations revenues. Rental revenues for the quarter decreased 10 percent as we experienced continued softness in semiconductor-related demand. The average monthly rental rate was comparable to the previous year, which reflects generally stable pricing conditions for both communications and general-purpose equipment in the current market. Average utilization for the quarter was 59.4% compared to 65.3% a year ago, and rental margins were 40% compared to 44% a year ago. Sales revenues increased 58% year-over-year to $8.7 million, with gross profit decreasing 9% to $3.1 million due to lower gross margins in 2023. The increase in sales revenues demonstrates our focus on reducing inventory to better align with current market demand. To address the currently challenging business conditions at TRS, we maintained our return on capital discipline. With our actions to reduce new equipment capital spending and continued focus on sales of used equipment, we have reduced fleet size based on original cost of equipment from 398 million at the end of March to 384 million at the end of September and ended the quarter with utilization at 60.3%. The remainder of my comments will be on a total company basis from continuing operations. Third quarter selling and administrative expenses increased 11.6 million to 48.5 million. The addition of Vesta Modular increased selling and administrative expenses by $6 million, which included $1.2 million amortization of intangibles. Interest expense was $11 million, an increase of $7.7 million as the result of higher average interest rates and $242 million higher average debt levels during the quarter, which was primarily the result of funding our acquisitions. The third quarter provision for income taxes was based on an effective tax rate of 27.3 percent, compared to 25.3 percent a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was 119 million, compared to 133 million in the prior year, with transaction expenses accounting for most of the reduction. Rental equipment purchases, excluding equipment received from recent acquisitions, were $171 million, compared to $130 million in the prior year. The total cash paid for acquisitions year-to-date of Vesta, Brackey, Dixie, and Inland was $462 million, emphasizing our strategic initiatives to grow the modular and portable storage businesses Proceeds from the sale of Adler tank rentals earlier this year was $268 million. In addition to significant investments in new fleet and the acquisitions, healthy cash generation allowed us to pay $34 million in shareholder dividends. At quarter end, we had net borrowings of $668 million, comprised of $175 million notes outstanding, and 493 million under our credit facility, with capacity to borrow an additional 157 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.03 to 1. Finally, our updated 2023 financial outlook. For the full year, We currently expect results from continuing operations to be total revenue between $820 and $830 million, adjusted EBITDA between $312 and $320 million, gross rental equipment capital expenditures between $190 and $200 million. Our outlook reflects the following expectations for the final quarter of the year. Modular rental revenues up sequentially from the third quarter. Modular rental-related services revenues at a level comparable to the first quarter of 2023. We expect fewer site-related services projects in the fourth quarter compared to the seasonally busier second and third quarters. Modular sales revenues comparable to the fourth quarter of 2022. Modular other direct costs of rental operations, comparable to the third quarter, as we continue to prepare buildings for new rental opportunities. Overall TRS performance, comparable to the third quarter, with the potential for some normal seasonal reduction in business levels towards year end. Total McGrath selling and administrative expenses up sequentially from the third quarter. We are very proud of McGrath's strong third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Travis, you may now open the lines for questions.